The auto component industry was moving in the slow lane even before the nationwide lockdown came into effect. Now, with production having come to a grinding halt, it is moving even further downhill.
The writing for the industry is on the wall: It will have to emerge from the pandemic transformed — and for the better — to survive.
“Everyone will have to fend for themselves. It is akin to Darwin’s theory of evolution — survival of the fittest will be the new norm,” says Deepak Jain, president of industry body Automotive Component Manufacturers Association of India.
But equally important will be collaboration across industry and functions and blurring of lines between physical and digital. “People have realised the importance of supporting and working with one another. This pandemic is paving the way for significant collaborative opportunities across the value chain,” Jain adds.
Once the losses from the shutdown are added up, the sector is likely to close 2019-20 with a sharp negative growth of 15 per cent, leading to a significant drop in revenues compared to the $57 billion it made in 2018-19.
Jain estimates a week’s closure of operations in March to add up to 3 per cent degrowth in the overall outlook for the last fiscal. There is zero revenue at present and cash conservation has become crucial. Expectedly, all investments planned for 2020-21 have been deferred.
The prospects are likely to remain precarious even after businesses reopen. The Covid-19 risk is not expected to disappear. The industry will need to ensure the health and safety of the workers and give them the confidence to come back to the job. Besides adjusting to the new normal, balancing seamless supply chains is going to be a challenge and resuming operations will involve ramping up with lean resources, which in turn would lead to more consolidation and collaboration.
However, buyers will continue to put off purchases, says Manav Kapur, executive director, of Steelbird International, an auto component maker. Vehicles have always been a luxury item and, therefore, in these tough times, they are positioned quite low on the priority list of buyers.
“In my estimate, it will take at least 3 to 4 months post lockdown for people to even begin thinking about buying vehicles,” he says.
The industry has already lost a month-and-a-half of the current financial year, and in the coming one-and-a-half months, it will barely be able to achieve half of what it normally produces. So, the volume of sales would be one-third of the sales in previous year quarter.
The emerging strategy of the future is one of keeping fixed costs down to become more sustainable, which means more digital, less brick-and-mortar and more work from home.
Although this is a direction everyone across industry is taking, including the auto industry, it could also be bad for the component makers. “Since our sector is directly related to mobility, we’ll have to bear negative growth for the next two to three years,” says Kapur.
A clearer blueprint of what the evolutionary changes for the industry might look like is emerging from the $8.5-billion TVS Group’s TVS Automobile Solutions Ltd (TASL).
Under its TASL 4.0 strategy, the company is using this time to explore and experiment its digital strategy. The company has identified four groups within the organisation to start thinking about its business with the mindset of a start-up so that it can start anew when the market opens up.
“We want to see these two months as a blip and hopefully when we come back to normal, we will continue with the entrepreneurship journey with a lot more vigour, even converting that itself into a business design, with a complete digital model,” says G Srinivasa Raghavan, managing director of TVS Automobile Solutions.
The idea is not to convert existing methods to digital, but to start thinking from a digital perspective and add existing brick-and-mortar support to it. It is working on marrying the digital with the physical supply chain so that customers can access information about componets, after-sales service and support at the click of a button. The company’s plans are to convert all the functions of an automotive aftermarket service provider — availability of parts, financial services and a fast-updated learning solutions — into a digital system to offer last-mile support.
Raghavan says the future is going to see more aggressive digital business design from the brick-and-mortar industry as this is where one can see value creation. It could also mean packing in more services at existing physical stores. So a garage might double up as a financial service provider and retailer for all types of spare parts and auto components.
Since cars themselves now have a mix of digital and mechanical technologies, the old way of selling spare parts and components and after-sales service via brick-and-mortar stores also need an overhaul.
“The customer would need digital learning and catalogue-based service. Considering all this, we are trying to bring the entire ecosystem closer to him online. Scaling up the use of our digital platform could add a different dimension to the supply chain. This will help us to reconfigure the entire supply chain structure so that it could become cost-effective,” says Raghavan.
With the industry rethinking its strategy, those that are unable to make this shift will either perish or be bought out, spurring a wave of consolidation.
“Over the next two years or so, we’ll witness plenty of consolidation opportunities in the industry as the smaller companies would have no option but to merge themselves with the bigger ones to avoid perishing from the change in the automotive landscape,” says Kapur.
“Therefore, we won’t see many partnerships emerge out of this consolidation wave, but simply buyouts,” he adds.